Wednesday, January 16, 2008

The Fed Smackdown by the High Priestess of US Monetarism.

In a Telegraphinterview, the legendary Anna J. Schwartz does a smackdwon on Greenspan's Fed (hat tip Greg Mankiw):

The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says...

According to Schwartz the original sin of the Bernanke-Greenspan Fed was to hold rates at 1 per cent from 2003 to June 2004, long after the dotcom bubble was over. "It is clear that monetary policy was too accommodative. Rates of 1 per cent were bound to encourage all kinds of risky behaviour," says Schwartz.

She is scornful of Greenspan's campaign to clear his name by blaming the bubble on an Asian saving glut, which purportedly created stimulus beyond the control of the Fed by driving down global bond rates. "This attempt to exculpate himself is not convincing. The Fed failed to confront something that was evident. It can't be blamed on global events," she says.

Her critique fits in nicely with some of my views. This Fed smackdwon seems to be catching on among big name economists.

No question that poor oversight was an important contributor to the housing boom. I try to keep the spotlight on the role monetary policy played under the Greenspan Fed because there are too many Fed apologists out there.